Informing and connecting businesses in New Jersey

Rationale for state bank doesn’t add up

When Gov. Phil Murphy campaigned on the vague but intriguing idea of creating a “state bank,” two questions arose immediately:

What exactly is that?

And what do the state’s existing banks think about it?

Well, we’re inching toward an answer to the first question. State Sens. Richard Codey (D-Livingston) and Nia Gill (D-Montclair) have introduced a bill that would create a state-owned and -operated bank, governed by a 13-member board, to hold public deposits and “promote small businesses, fair educational lending, housing, infrastructure improvements, community development, economic development, commerce and industry in New Jersey.”

And we now have an unequivocal answer to the second question. In recent testimony before the Assembly Financial Institutions and Insurance Committee, Michael Affuso, executive vice president of the New Jersey Bankers Association, said a state bank is unnecessary, a major threat to local banks and a possible nexus of corruption. He made a convincing argument.

Proponents say that a state bank could hold — and use for community purposes — the $1.5 billion in state funds that are deposited in foreign banks. Affuso pointed out that New Jersey doesn’t need a state bank to repatriate that money. The state treasurer could simply be directed to do it — and have local banks bid on blocks of the deposits, he said.

If the idea is to generate more local lending, Affuso said New Jersey already is doing a good job in that respect and that a state bank is unnecessary. Data from the Federal Deposit Insurance Corp. show that 97 percent of the state’s banks are already “lending in their footprint,” he said.

And if the idea is to take municipal deposits out of local banks and put them into the new State Bank of New Jersey, the result would be a “catastrophe,” Affuso said. “For 25 percent of New Jersey headquartered banks, municipal deposits are 20 percent of all deposits,” he said. “So, if you suck those deposits out, these banks are going to struggle.”

Finally, Affuso quite correctly noted — this is New Jersey, after all — that a state bank would inevitably be subject to corruption, saying, “I don’t think it’s beyond the realm of reason to think that there’s a possibility that somebody might call somebody in New Jersey and say, ‘Hey, give this entity a loan.’”

Ya think?

Republicans on the committee were quick to seize on the corruption angle. They are worried, no doubt, that a Democratic governor would use a state bank to help Democratic friends and associates. The Republicans know this is true because they know that a Republican governor would use a state bank to help Republican friends and associates.

Only one other state has a state bank — North Dakota. And its state bank was created in 1919. Not much of a precedent for New Jersey in 2018.

Proponents of a state bank certainly mean well. They see it as an agent for positive social change. But good intentions are not reason enough to allow the state to go into competition with its existing banks and risk the industry disruption and the corruption that move could entail.